Innovation is Not Enough

The idea that successive waves of innovation are the main driver of long-term performance in a new or emerging business—or an existing one, of course—appears to be sound when viewed in the abstract. Clearly, innovations in technology, processes, and methodology have occurred, sometimes dramatically, in the U.S. and world economies. Whole new businesses emerged over the past two centuries as advances in manufacturing, transportation, services and communication came in sometimes rapid, successive cycles, speeding up exponentially in the past several decades. But the important lesson from economic history is that innovation alone does not guarantee success to the individual enterprise, whether pioneering or merely riding along with the changing opportunities.

It is here that the interpretation of the new economy and its innovative aspects began to conflict with basic economic reality in the past several years. As high-technology and “dot.com” enterprises attempted to seize the potential of innovative advances, basic notions of achieving positive cash flow and profits were cast aside. Instead, the argument was: “As long as we keep innovating and are doing it faster than others, we’ll have positioned ourselves to warrant the confidence of our investors.” It was this argument that contributed to the phenomenon of initial public offering prices soaring to unprecedented heights, giving new and untried enterprises market valuations that rivaled those of long-established, successful Fortune 100 corporations. The magic lure of innovation became a substitute for economic performance, and rampant speculation rather than thoughtful analysis drove venture capitalists, investment bankers, analysts, and individual investors to participate in the ride to quick riches.

Forgotten was the fact that where a great many innovators try, only a very few succeed, and they succeed only because they achieve acceptable financial results within a time span over which investors are willing to commit themselves. Ignored was the fact that results depend on the ability to deliver products and services which customers are actually willing to buy at adequate prices. One only has to think of the number of automobile companies that were started at the beginning of the automotive age, and how many survived, despite technical innovations made by many firms that no longer exist. The reason the innovating company succeeds is because it is built on sound, sustainable strategies, effective management, and economic decision-making, enabling it to seize and exploit innovative opportunities better than its rivals. If successive innovations come along, the successful company will repeat these principles. Thus it is not innovation alone, but the consistent and difficult application of sound strategic and economic management that brings about eventual success.

A lesson from the dotcom era of business, where companies thought if they could simply out-innovate competitors they would survive despite burning through investment money.